TaxTMI 
TaxTMI 
2024 (12) TMI 199
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....egard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs. 4,52,848/- by allocating the expenses of head office against the profits of the MEPZ unit and thereby erred in decreasing the profit of the appellant from the MEPZ unit that too by recording incorrect facts and findings and without providing adequate opportunity of hearing. 2. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in allocating the bank and loan processing charges amounting to Rs. 73,311/- to the MEPZ unit despite the fact that no loan amount was used in the MEPZ unit and thus erred in reducing the profit of MEPZ unit by an amount of Rs. 73,311/- that too by recording incorrect facts and findings and without providing adequate opportunity of hearing. 3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in sustaining the action of Ld. AO in making addition of Rs. 24,69,687/- by calculating a notional profit @12.30% and applying the same on the gross value of goods....
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....and sitting fees amounting to Rs 82,48,607/- were shown only under the head 'Head Office'. The AO observed that the expenses of the head office which have not been allocated to the manufacturing units, should be allocated to the MEPZ in the ratio of their turnover as they relate to every aspect of the business and cannot be isolated for any single unit and attributed to the head office. The Assessing Officer further observed that the effect of not allocating the expenses to tax exempt unit is that the loss is reduced in that unit and profit is reduced in the taxable units. Accordingly, the Assessing Officer relying upon the decision of the decision of the ITAT Mumbai Bench in the case of Asea Brown Boveri Ltd 77 TTJ Mum 502, allocated a sum of Rs. 4,52,848/- to the MEPZ unit in the ratio of their turnover and made addition of the same. 5. Similarly, the AO allocated the Bank and loan processing charges of Rs 73,311/- to the MEPZ unit. Regarding addition on account of price difference in respect of goods transferred to 10AA unit, the Assessing Officer observed as per Central Excise Act, the profit @ 10% is assumed and duty is charged @ cost plus 10%. The AO however, adopted the G....
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....8 TTJ 778. 11. Per contra, the ld. DR submitted that the decision of ITAT in 2008-09 to 2010-11 has been given on different facts. The ld DR submitted that for AY 2008-09 to 2010-11, the assessee had declared loss in its MEPZ unit. The issue decided by the CIT(A) was that the loss of the MEPZ unit be set off against the income of the other units. Consequently, the CIT(A) held that the allocation of HO expense and bank and processing charge to the eligible unit will have no tax implication and allowed the assessee appeal. This finding of the CIT(A) was confirmed by the ITAT. The ld DR submitted that in the impugned year the issue of loss in the MEPZ unit to be set off with the profits of other unit does not exist and hence the factor of expense allocation being tax neutral as decided by the CIT(A) and the ITAT for AY 2008-09 will not apply in the AY 2011-12. 12. We have heard the rival submissions and have perused the relevant material on record. Having heard the rival submissions, we find that the facts in the instant year are materially different from the facts as available in AY 2008-09 and 2009-10. In AY 2008-09 and 2009- 10, the assessee had declared loss from the 10AA el....
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....(HO) does not exist for its own sake, but its existence is relevant for all activities undertaken by various undertakings /divisions/profit centers and ought to be reasonably allocated to the eligible undertakings. We also note that allocating the expenses on proportionate basis of turnover is reasonable. We are, therefore, of the considered opinion that the AO is justified in allocating such expenses in the nature of commission to the Directors, Audit fees and bank and loan processing charges to the MEPZ units. 15. We are supported in our view of apportionment of expense by the decision of the hon'ble Delhi High Court in the case of EHPT India P ltd Delhi Court 350 ITR 41 which accepted, in principle, the concept of allocation of expense to the eligible units as follows: "In the light of the observations of the Supreme Court in Hukum Chand Mills Ltd. (supra), in a case where alternative methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exactness. If such is the endeavour, it can hardly be said that there is an attempt to distort the profits".....
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....elied upon the following decisions to support his contention: * CIT vs. Indian Petrochemicals Corp [2016] 74 Taxmann 163 (Gujarat) * ACIT v National Agricultural Co-operative Marketing Federation of India * PCIT vs. Balmer Lawrie and Company Ltd. [2023] 149 Taxmann 286 (Cal) * PCII vs. Rajasthan State Seed Corporation Ltd. [2017] 88 Taxmann 445 (Raj) 21. Per contra, the ld. DR relied upon the orders of the authorities below. 22. We have heard the rival submissions and have perused the relevant material on record. We find that the decision relied upon by the assessee propound the principle that expense is allowed in the year when the same is crystalised. We also find that the CIT(A), while dealing with the prior period expense of Rs 41,51,598/-, has found for a fact that expense amounting to Rs 36,46,442/- on account of prior period expense has crystalised during the year and allowed the same. The CIT(A) however, disallowed Rs 5,05,156/- by giving a finding that the liability to that extent has not crystalised in the current year. The assessee, before us, has argued that the prior period expenses quantified during the year is allowed in the ....
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....e chargeable to tax in case of recipient, an assessee is expected to approach the Assessing Officer u/s 195(2) of the Act rather than taking the decision himself in respect of an issue for which the jurisdiction has been conferred upon him. 30. The ld AR of the assessee vehemently argued that ESGI is an Independent warehouse service provider, based out in USA. It is submitted that the scope of the contract include, among other things, that the ESGI provide appropriate floor space at its warehouse at USA; to accommodate AVTEC consignments; receiving AVTECH export documents from their designated bank; Loading/Uploading of Material/ Unpack all pieces, conduct perpetual inventory checks; insuring stock/ Provide Quality Engineering Services. It is the say of the AR that AVTECH has no control over the activities of ESGI. 31. The ld AR lead us to the provision of section 195 and vehemently submitted that the moment a remittance is made to non-resident, obligation to deduct tax at source does not arise; it arises only when such remittance is a sum chargeable under section 4, 5 and 9 of the I T Act. It is stated that apart from the above charging provisions sections 90, 91 and DTAA ar....
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....or warehouse charges as fees for technical services. It is stated that there is a continuation of services i.e., the assessee is paying the warehousing charges on yearly basis to ESG International. The Hon'ble Delhi High Court in CIT vs. Bio-Rad Lab (Singapore) Pte Ltd 155 Taxmann 646 (Delhi) (2024) for the proposition that the continued provisioning and rendering of services over a substantial period of time would clearly detract from an assumption that technical or consultancy services had been 'made available'. 37. The ld AR vehemently argued that mere rendering of services would not be sufficient for being Technical or consultancy services. It has to be read alongside and in conjunction with "make available". Both the rending of service and the skill, knowledge and expertise being made available are conditions which must be concurrently and cumulatively satisfied. Mere furnishing of services would not suffice and a liability of tax would be triggered only if the technical or consultancy service were coupled with a transfer of the expertise itself. The AR relied on the Hon'ble Delhi High Court in International Management Group (UK) Ltd. V CIT [2024] 164 taxmann 225 (D....
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....nt made in Explanation to section 9 does not nullify the exception provided in section 9(1)(vii)(b). In other words, even where the non-resident has provided services outside India and received payment thereof, the payment would not be deemed to accrue or arise in India, if the services provided by the non-resident are utilized by the resident in a business carried on outside India or for the purposes of earning income from any source outside India. He relied on the following judgements : i) International Management Group (UK) Ltd. vs. CIT [2024] 164 Taxmann 225 (Delhi) ii) CIT v IndusInd Bank Ltd. [2019] 106 taxmann 343/264 Taxmann 190/415 ITR 115 (Bom) iii) HCL Singapore Pte. Ltd. v ACIT [2024] 158 taxmann 45 (Delhi- Tri) 40. Per contra the ld DR vehemently supported the orders of the authorities below. 41. We have heard the rival submissions and have perused the relevant material on record. Having heard the rival submissions, we find that the factual matrix of the instant case is that the assessee has made payment to ESGI, a non-resident independent warehouse service provider based in USA for providing appropriate warehousing facilities at its wa....
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.... is not so assessable, there is no question of tax being deducted." 44. We are also inclined to agree with the contention that in cases of composite contract, the assessee needs to apply u/s 195(2) only in the event where payer is in doubt of taxability of the payment in the hands of recipient. This view is supported by the decision of Transmission Corpn of AP ltd V CIT (1999) 239 ITR 587(SC), which held as under: "..195(2) provides a remedy by which a person may seek a determination of the appropriate proportion of such sum so chargeable where a proportion of the sum so chargeable is liable to tax. The said sub-section gets attracted only in cases where the payment made is a composite payment in which certain proportion of payment has an element of income chargeable to tax in India. The words 'such sum' clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India." 45. Coming to the crux issue whether the payment made to ESG International, USA is an income accrued or arise in India as per section 4,5 &9(1)(vii)(b)r.w. Article 12 of the In....
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....ing any income from any source outside India. In the instant case, the assessee made payment made to ESG International USA for the space utilization of warehouse, outside India, for the international operation and for the delivery of material through the warehouse to the overseas customers of the assessee. The ESG International, USA has no business activity in India. We therefore are of the considered opinion that the payment made by the assessee to ESG International, USA is not an income within the ambit of section 9 of the Act. We are supported in our findings by the following decisions: i) International Management Group (UK) Ltd. vs. CIT [2024] 164 Taxmann 225 (Delhi) ii) HCI. Singapore Pte. Ltd. v ACIT [2024] 158 taxmann 45 (Delhi-Tri) 46. On the issue of application of Article 12 of the Indo-USA DTAA, we find that the condition of "managerial" services do not find any mention in the Article 12 of the said DTAA. There is a restrictive definition of FTS provided in DTAA and it will, on account of the provision of section 90(2) of the Act, have precedence over the wider definition provided in Explanation 2 of section 9(1)(vii) which includes managerial, techn....
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....le' conditions are not complied with. Therefore, the decision of the Hon'ble Delhi High Court in CIT vs. Bio-Rad Lab (Singapore) Pte Ltd 155 Taxmann 646 (Delhi) (2024) squarely applies that the continued provisioning and rendering of services over a substantial period of time would clearly detract from an assumption that technical or consultancy services had been 'made available'. On this account also the payment made to ESGI do not fall under the description of FTS and accordingly we hold that there is no requirement of tax deduction u/s 195 of the Act in India for such payment. In that view of the matter, Ground No. 7 to 9 of the assessee is allowed. 49. Ground Nos. 10 to 12 are general in nature. 50. In the result, the appeal of the assessee is partly allowed. ITA No. 8081/DEL/2018 [A.Y 2013-14] 51. Ground No. 1 is general in nature. 52. Ground No. 2 pertaining to allocation of head office expenses has already been dealt by us hereinabove and decided in favour of the Revenue and against the assessee. Respectfully following the same, we direct accordingly. 53. Ground No. 3 relating to FTS - Ware house charges has already been discussed and decided by us in f....
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....ilders, submitted that the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the holding company would ordinarily be entitled to deduction of interest on its borrowed loans. The ld. counsel for the assessee also relied upon the decision of the Hon'ble Madras High Court in the case of Elgi Equipment Ltd 20 Taxmann 142. 62. Per contra, the ld. DR relied upon the orders of the authorities below. 59. We have heard the rival submissions and have perused the relevant material on record. Having heard the rival submissions, we find force in the contentions of the ld. counsel for the assessee. The ld. CIT(A) has admitted that the said expense has been incurred for subsidiary company and the joint venture. We find that the ld DR has not controverted the claim that the directors of the assessee undertook foreign travel for the selling the products of the JV and the subsidiary. This would, in our opinion, naturally advance the business interest of the assessee and there is commercial expediency in undertaking such travel. In view of this and following the decision of the Supreme Court in S.A.Builders, we direct ....
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.... ld DR relied on the orders of the authorities below. 69. We have heard the rival submissions and have perused the relevant material on record. Having heard the rival submissions, we find force in the contentions of the ld. counsel for the assessee. We note that the assessee has paid the excise duty on the raw materials for the goods manufactured at the time of manufacturing. When the goods are returned, the assessee does not get back the excise duty paid on the raw materials. Such a payment on account of excise duty has to be allowed as a deduction u/s 37(1) as the same is incurred for the business purpose. This proposition was allowed by the hon'ble Delhi High Court in the case of Samtel India (supra). The AO's method of adding back the non-reversed excise duty to WIP once the sales return takes place, is not correct as when the goods are received back on return, excise duties are not reversed by the Excise Department. Following the decision of Samtel India (2014) 43 Taxmann 104(Delhi), we therefore direct the AO to delete the addition on account of irrecoverable taxes. The ground no 2 is allowed. 70. Ground Nos. 4, 5 and 6 are general in nature. In the result the appeal of....
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....d 5 is allowed. 78. Ground No. 6 pertains to upholding that disallowance of 93,040/- on account of Gift and present. 76. The Assessing Officer observed that the amount of Rs. 1,02,520/- relating to gift and personal expenses have no relation to business activity and accordingly made disallowance of the same. The ld. CIT(A) observing that no breakup of the same was submitted, and the assessee could not explain how the gift articles given to auditors is for business purposes, partly allowed the claim and confirmed Rs. 93,040/-. 77. The ld. counsel for the assessee vehemently contended that expenditure incurred is incidental to his trade for the purpose keeping the trade going is an allowed expenditure. For this contention, he relied on the decision of the Hon'ble Supreme Court in the case of Delhi Safe Deposit Co. Ltd. [133 ITR 756] (SC). The ld. counsel for the assessee relied on the decision in the case of CIT v ChandulalKeshavlal& Co 38 ITR 601 wherein it has been held that "If the expenditure is incurred for the purpose of trade of the assessee and it does not matter thatpayment may enure for the benefit of third party, is allowed." The ld AR also relied on the case ....
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....1)(c) of the Act. 88. Briefly the facts of the case is that the Assessing Officer levied penalty on account of addition made on account of allocation of HQ expense of Rs 4,79,486/-; allocation of bank loan and processing charge of Rs 3,27,223/- and addition of FTS of 99,98,079/- on the grounds of assessee having furnished inaccurate particular of income. The AO relied upon the decision of the Hon'ble Supreme Court in the case of Union of India and another Vs. Dharmendra Textiles 306 ITR 277 and Atul Mohan Bindal 317 ITR 1 wherein it has been held that mens rea need not be established before imposition of penalty u/s 271(1)(c) of the Act. 89. Aggrieved, the assessee went in appeal before the ld. CIT(A). 90. After careful consideration of the facts and submissions, the ld. CIT(A) deleted the penalty on account of allocation of HQ expense of Rs 4,79,486/- and allocation of bank loan and processing charge of Rs 3,27,223/-. The CIT(A), however, relying upon Explanation 1 to section 271(1)(c), upheld the penalty on addition of FTS of 99,98,079/-. 91. Aggrieved, the assessee is in appeal before us. 92. We have heard the rival submissions and have perused the relevant ma....